California has modernized its research and development (R&D) tax credit landscape with the enactment of Senate Bill 711 (SB 711). For businesses filing 2025 California returns in 2026, this legislation represents a significant overhaul of this state innovation incentive. By aligning more closely with federal methodologies while maintaining strategic "decouplings," the new law creates planning opportunities for growing companies.
1. The Headliner: Adoption of the Alternative Simplified Credit (ASC)
The most impactful change is California’s adoption of an Alternative Simplified Credit (ASC) calculation. Historically, California's "traditional" method required a "fixed-base percentage," often tied to gross receipts and R&D spend from the 1980s — a data hurdle that disqualified many modern startups.
Effective for tax years beginning January 1, 2025, SB 711 introduces the ASC method while simultaneously repealing the Alternative Incremental Credit (AIC). The new California ASC rates are:
- 3.0% of current-year qualified research expenses (QREs) exceeding 50% of the average QREs from the prior three years.
- 1.3% of current-year QREs if the taxpayer has no QREs in any of the prior three years.
Why It Matters
Companies that previously generated little to no credit under the AIC or traditional methods due to high historical revenue may find the ASC provides a much higher "benefit-to-effort" ratio.
2. The "Irrevocable" Election: A 2026 Milestone
SB 711 changes the procedural stakes for tax departments. For the 2025 tax year, businesses must affirmatively elect their preferred calculation method — traditional or ASC — on a timely filed original return.
No "Do-overs"
Once the ASC election is made, it cannot be revoked for that year, and switching back in future years typically requires Franchise Tax Board (FTB) consent.
Protective Elections
Companies in a loss position should still evaluate making a protective election to lock in the ASC methodology for future carryforwards.
3. The Section 174 Disconnect: A Major State Advantage
While SB 711 updates California’s federal conformity date to January 1, 2025, it purposefully decouples from federal Section 174 capitalization rules.
|
Feature |
Federal |
California |
| R&D Expense Timing | Must capitalize and amortize over five or 15 years | Full immediate expensing allowed |
| Foreign R&D | 15-year amortization required | Fully deductible (if otherwise qualifying) |
| Impact | Higher federal taxable income in early years | Lower state taxable income; immediate cash flow |
4. Utilization and Carryforwards
Despite these expansions, existing guardrails remain. California continues to adhere to IRC Section 41(g), which restricts the use of R&D credits to offset tax only from the specific trade or business that generated them. A significant benefit of SB 711, however, is the clarification that unused R&D tax credits can now be carried forward indefinitely (replacing the previous 15-year limit), ensuring that credits generated today do not expire before they can be utilized.
Action Plan for 2026 Filing
To maximize the value of SB 711, businesses should act immediately.
Dual-track Modeling
Calculate the 2025 credit using both the traditional and the new 3% ASC method to identify the optimal election.
Audit-ready Lookbacks
Gather QRE data for 2022, 2023 and 2024 to establish the three-year average required for the ASC.
Reconcile Book-tax Differences
Ensure the tax software accounts for the immediate deduction of Section 174 expenses for California while maintaining amortization for federal purposes.
Your Guide Forward
SB 711 makes the 2025 California return a critical planning moment. The new ASC, irrevocable election rules, and Section 174 decoupling can significantly impact the value and timing of R&D tax benefits, but only if decisions are made before filing.
Now is the time to model your options, confirm historical QRE data, and align federal and California treatment. Connect with Cherry Bekaert’s R&D Tax Credit team to evaluate the optimal credit methodology and position your business to fully leverage California’s updated R&D framework.
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